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Copper Zooms to 3-Year High: Will the Momentum Last?

Copper is on a tear, hitting fresh three-year highs thanks to encouraging economic numbers out of China — the world’s biggest consumer of the metal. Renewed optimism about the Chinese economy has given the red metal a fresh shot in the arm.

‘“Dr. Copper” on Fire

Prices of copper for December delivery touched roughly $3.18 per pound on the New York Mercantile Exchange on Tuesday, a level not seen since September 2014. Copper prices on the London Metal Exchange (LME) also hit a three-year high on Tuesday, clocking $6,970 per ton, according to Reuters.

The widely used industrial metal, nicknamed Dr. Copper for being a reliable barometer to track the health of the world economy, gained from encouraging economic data from China. This raised expectations of higher demand for the commodity.

China's official manufacturing Purchasing Managers' Index (PMI) for August came in at 51.7, up from 51.4 in July and also exceeded expectations. A reading above 50 indicates growth. The better-than-expected August reading came on the heels of strong production and a rise in new orders.

Moreover, China Caixin/Markit services PMI rose to 52.7 in August from 51.5 in July on a pickup in new business orders. These data suggest that the world's second largest economy is in good health notwithstanding a cooling property market and high debt levels.

China maintained the momentum of steady and sound development in first-half 2017, laying a strong foundation for achieving the government’s GDP growth target of 6.5% for this year.

China holds the largest share by far of global copper consumption (roughly 46%), and has a significant share in the total production of pure copper. Trends in Chinese GDP growth and world trade have a significant influence on copper prices. There is a strong correlation of the metal with ups and downs in the Chinese economy. As such, positive economic data are likely to step up the nation’s demand for the red metal.

Another factor that contributed to copper’s rally is a sharp drop in output from Codelco — the world’s biggest copper producer. On Sep 5, the Chilean state copper company said that production for first-half 2017 from its copper operations fell to 798,000 tons from 843,000 tons a year ago.

Copper prices were also supported by a weak U.S. dollar. A weaker greenback makes dollar-priced metals cheaper for holders of other currencies.

The Red Metal’s Rebound

Copper, an important barometer for the global economy, is a major industrial metal that plays a significant role in emerging countries. Trends in the copper market are often a useful indicator of the state of the global economy given the metal’s diverse applications. Developments in the world economy have a strong correlation with movements in copper prices.

After vastly underperforming other metals, copper witnessed a sudden spike at the end of 2016. A pick up in global manufacturing activity and hopes of Trump's infrastructure spending drove the red metal’s recovery. Optimism around the Chinese economy and indications of tighter global mine supply aided prices.

Moreover, supply disruptions at some of the key copper mines including BHP Billiton’s Escondida mine (the world's biggest copper mine) in Chile earlier this year and a strike at Freeport-McMoRan’s Grasberg operations in Indonesia led to a decline in mined copper production and provided a thrust to prices.

Copper received further boost in July on reports of a potential Chinese ban on certain imports of copper scrap by the end of 2018 as part of the country’s move to reduce waste. This would lead to higher demand for refined copper and copper concentrate. While China’s imports of copper scrap increased this year, the country’s demand for refined copper remains depressed. As such, a ban on scrap would result in increased imports of refined copper.

Moreover, investors are betting on copper as the metal is expected to significantly gain from the booming market for electric vehicles that use a substantial amount of copper in their batteries.

Copper prices are up around 24% so far in 2017 and the metal is trading roughly 50% higher than last year. The non-ferrous metal is among the best performing commodities this year.

The Zacks Non Ferrous Mining industry has also outperformed the broader market in a year’s time. The industry has gained around 31.6% in this period, higher than the S&P 500’s return of around 12.3%.

Rising prices have also given a boost to share prices of copper producers. Mining majors Freeport-McMoRan Inc. (FCX - Free Report) and BHP Billiton Limited (BHP - Free Report) have both seen their shares shoot up roughly 25% over the past three months.

Moreover, shares of Glencore Plc (GLNCY - Free Report) , one of the world’s top copper producers, have rallied around 27% in the same time frame. Southern Copper Corporation (SCCO - Free Report) shares are also up 15% while Rio Tinto plc (RIO - Free Report) has gained 17%. Rising prices of copper is a good sign for these mining stocks.

While copper has lately been enjoying a stellar run, analysts are skeptical about the sustainability of the recent price rally. Many believe that prices of the metal will come under pressure as the market remains adequately supplied and demand is not strong enough. Some analysts have also cautioned that the markets are overheated and will experience a price correction soon.

Oversupply in the market also continues to pose a threat on copper prices. In the short to medium term, new and expanded production should keep the market well supplied. Chile is expected to contribute significantly to supply growth in 2017.

BHP Billiton, last month, said that production from the Escondida mine is running at normal levels. Completion of a major investment program is expected to significantly boost output from the mine this financial year. Freeport and the government of Indonesia have also recently agreed on a framework that would allow Freeport to keep operating its Grasberg mine — the world’s second-biggest copper mine.

There are also lingering concerns surrounding China’s copper demand. China’s move to tighten credit growth could hurt demand for copper in its property and infrastructure sectors. Beijing's crackdown on risky debt may lead to slower economic growth in the second half of 2017. Any demand weakness in China would put downward pressure on copper prices.

As such, it remains to be seen if the good times for copper stay or passes soon.

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At the center of everything we do is a strong commitment to independent research and sharing its profitable discoveries with investors. This dedication to giving investors a trading advantage led to the creation of our proven Zacks Rank stock-rating system. Since 1988 it has more than doubled the S&P 500 with an average gain of +25% per year. These returns cover a period from 1988-2017. Zacks Rank stock-rating system returns are computed monthly based on the beginning of the month and end of the month Zacks Rank stock prices plus any dividends received during that particular month. A simple, equally-weighted average return of all Zacks Rank stocks is calculated to determine the monthly return. The monthly returns are then compounded to arrive at the annual return. Only Zacks Rank stocks included in Zacks hypothetical portfolios at the beginning of each month are included in the return calculations. Zack Ranks stocks can, and often do, change throughout the month. Certain Zacks Rank stocks for which no month-end price was available, pricing information was not collected, or for certain other reasons have been excluded from these return calculations.

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